Question

The current price of oil (P) is approximately $50 per barrel, while global oil consumption (Q)...

The current price of oil (P) is approximately $50 per barrel, while global oil consumption (Q) is approximately 100 million barrels per day. Suppose the daily demand and supply of oil can be apporximated as linear functions of price, given by:

Demand: Qd = a + bP Supply: Qs = c + dP

where Qd and Qs are quantities demand and supplied per day (measured in millions of barrels) P is price (measured in dollars per barrel); while a, b, c and d are numbers.

A.) Assuming the current price elasticity of daily demand for oil is -0.50 and the current price elasticity of daily supply is 0.50, coupled with the market currently being in equalibrium (i.e., P=50 and Qd = Qs (i.e.,Q) = 100 are the equailibrium price and quantity) determine the values of a, b, c,and d.

B.) Now, suppose world leaders reach an agreement to reduce global carbon emission by imposing a $t per barrel tax on consumers of oil with the goal of reducing global daily oil consumption by 20% determine the value of t sufficient to reach this target reduction in oil consumption.

Homework Answers

Answer #1

a) In equilibroum, demand = supply.

Thus, a + bP = c + dP

which gives (a-c) = (d-b)P

Since Q = 100 and P = 50 (given the economy is in equilibrium), we get:

(a-c)/(d-b) = 50 .........(1)

Also, given the elasticity of demand and supply, we get two more equations:

-0.50 = DQ/DP. P/Q

whic gives 0.50 = b. (50/100) = b/2

Thus, b = 1

Similarly for elasticity of supply, we get:

0.50 = d/2, thus d = 1

Putting the values of b and d in the equation (1), we get:

a = c

Thus, Qd = a - P which gives a = c = 50.

B) Given, new Q ´= 80, new price = (50+t)

Thus, new demand curve equation is : Qd = a + b(P+t) which gives:

80 = 50 + (P+t) which gives t = 30.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that Saudi Arabia lets other members of OPEC sell all the oil they want at...
Suppose that Saudi Arabia lets other members of OPEC sell all the oil they want at the existing price which the Saudis set and other members accept. The daily world demand for OPEC oil is given by: P = 88 – 2Q where P is the price per barrel of oil and Q the total quantity of OPEC oil (in millions of barrels per day). The supply function for other members of OPEC who behave like a “competitive fringe” is...
In this problem, you are to analyze the effects of the December 1973 OPEC oil embargo....
In this problem, you are to analyze the effects of the December 1973 OPEC oil embargo. Since 1974, the world oil market has been dominated by the OPEC cartel. By collectively restricting output, OPEC has succeeded in pushing world oil prices well above what they would have been in a competitive market. In 1974 OPEC accounted for about two-thirds of the world oil supply. Suppose the supply of oil provided by non-OPEC members can be described by the linear equation...
1. Consider the following demand and supply curves: P 20 18 16 14 Q 0 1...
1. Consider the following demand and supply curves: P 20 18 16 14 Q 0 1 2 3 P 2 3 4 5 Q 0 1 2 3 a. What is the equation of this demand function? b. What is the equation of this supply function? c. Solve for equilibrium price and quantity. D. The market demand and supply for jet fuel is provided by the following functions: Qd = 140 - P Qs = -160 + 4P Where: P=...
Show work please Assume the current spot price for crude oil is $65.25 per barrel and...
Show work please Assume the current spot price for crude oil is $65.25 per barrel and the futures price for crude oil is $65.30 per barrel. A futures contract is for 1000 barrels. On Monday, Stacey buys one futures contract from Ben. Both Stacey and Ben are speculators in this futures market, whose initial margin requirement is $6,500 and whose margin maintenance requirement is $5,000. For hedgers the initial margin requirement is the same as the margin maintenance requirement. Assume...
Let the market demand curve be QD=8-P and the market supply curve be QS=P. Let price...
Let the market demand curve be QD=8-P and the market supply curve be QS=P. Let price P be measured in $/unit and let quantity Q be measured in singular units (i.e. simple count). Solve for the equilibrium price P* and quantity Q*. Now, assume the government imposes a $2/unit tax on consumers, which leads to wedge/gap between the buyers’ price Pb and the sellers’ price PS. Rewrite the demand and supply curves using Pb and PS, respectively. Write down the...
You are the manager of a theater. At present the theater charges the same admission price...
You are the manager of a theater. At present the theater charges the same admission price of $8 to all customers, regardless of age. You propose a two-tier pricing scheme: $5 for children under the age of 12 and $10 for adults. You tell your supervisor that your proposal is likely to increase revenue. "What must be true about the price elasticity of demand if your proposal is to achieve its goal of raising revenue? 1) Explain the concepts of...
Saudi ends voluntary output cut as oil prices rebound . Saudi Arabia will boost output in...
Saudi ends voluntary output cut as oil prices rebound . Saudi Arabia will boost output in July to match its Opec quota while ending voluntary deeper cuts as it sees need for more oil at home amid signs of global demand recovery, the Saudi energy minister said on Monday. Market sources expect the UAE and Kuwait will also follow suit by not extending beyond June their voluntary additional oil output cuts of 1.180 million barrels per day. Opec+ alliance, including...
In a presidential campaign, a candidate proposes a 50 cent per gallon tax on gasoline. The...
In a presidential campaign, a candidate proposes a 50 cent per gallon tax on gasoline. The idea of a gasoline tax is both to raise government revenue and to reduce oil consumption and the country’s dependence on oil imports. The Demand and supply functions are given by Qd=150-50P and Qs=60+40P respectively. If the candidate is voted into power and the policy is adopted: Calculate the equilibrium quantity and price before tax.(1 mark) What will be the equilibrium quantity and price...
Suppose the average monthly demand for cigarettes can be described by the equation QD = 30−p,...
Suppose the average monthly demand for cigarettes can be described by the equation QD = 30−p, and supply can be described by the equation QS = 18+2p, where p is the price of a pack of cigarettes. When there is no tax on cigarettes, the equilibrium price is p0 =$4 per pack and Q0 =26. (a) Suppose the government sets a specific tax on tobacco producers of τ = $1.50 per pack to reduce tobacco consumption. How much do consumers...
Assume that consumers view tax preparation services as undifferentiated among producers, and that there are hundreds...
Assume that consumers view tax preparation services as undifferentiated among producers, and that there are hundreds of companies offering tax preparation in a given market. The current market equilibrium price is $120. Jojo’s Tax Service has a daily, short-run total cost given by TC = 100 + 4Q2. Answer the following questions: How many tax returns should Jojo prepare each day if her goal is to maximize profits? How much will she earn in profit each day? A perfectly competitive...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT